Opinion: Are Bernard Madoff’s victims greedy?

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The Times’ editorial board weighed in Friday in favor of a court rulingthat limits how much the victims of Bernard Madoff’s scam can recover from the liquidated Madoff accounts and from the Securities Investor Protection Corp. Some victims claimed they were entitled to the full value reported on their last account statements from Madoff, even though Madoff essentially made up those numbers. The court disagreed, and so did The Times’ board.

Several readers suggested that the victims were just being greedy. For example, a reader identified as ‘p.j. evans88’ offered this observation:

Short investment guide: If it sounds too good to be true, it’s fraud.

Bernie was promising them returns that were well above average, for years on end. That should have been a tipoff to potential investors, but they were greedy, not smart.

My take is a bit different. The gains Madoff reported were credible and modest in comparison to the Dow’s bull runs; the incredible aspect was the unbroken string of gains regardless of how Wall Street fared. The later an investor joined Madoff’s fund, the less he or she could have been expected to notice how unrealistic the performance was.

There’s also the issue of whether investors should be able to trust their account statements. The appeals panel suggested that victims of fraud could successfully claim the full amount shown on their account statements if they had instructed a broker-dealer to buy those securities specifically. Madoff’s clients didn’t; they gave him their money and counted on him to bring the magic. But the same description applies to everyone who uses an investment advisor to manage their holdings rather than buying securities directly.

And from that perspective, the ruling is unnerving. Can people who use investment advisors cash out the gains in their account without fear of having the money clawed back if the gains prove to have been fraudulent?

The bottom line is that investing in securities is an inherently risky proposition. The Securities Investor Protection Corp. guarantees that if a broker-dealer goes bankrupt, its customers will be given a degree of protection that won’t necessarily cover all their losses. If the liquidated company doesn’t have the assets to reimburse investors for all their holdings, an industry-financed fund will reimburse them for up to $250,000 for cash investments or $500,000 for securities held by the broker-dealer.

Madoff evidently didn’t hold any actual securities for his customers. According to the court, he concocted transactions to make it appear that he had invested his clients money with uncommon savvy. It was a con, and the right response is to try to return to his clients’ as much of the money they invested as possible. As for the fictitious gains, Madoff’s demise shouldn’t make them real.

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-- Jon Healey